Many executives delivered 'bang for the buck'

William Patalon IIISun Staff

For 2004, a year that saw the shares of T. Rowe Price Group Inc. surge more than 31 percent, company chief executive George A. Roche received a more modest 21.7 percent bump in his compensation - just about all from performance bonuses.

In short, a half-million-dollar increase in his 2004 bonus was Roche's reward for guiding the company through a year that saw its market value soar nearly $2 billion.

The bottom line: When it comes to executive compensation, T. Rowe Price is one of a number of Maryland public companies where shareholders are getting "bang for the buck."

Making these judgments isn't always easy.

"Executive compensation is a very complex subject," with dozens of variables that can influence the outcome, said industry veteran Paul R. Dorf, director of consulting services for Compensation Resources Inc. of Upper Saddle River, N.J. "There are a lot of separate issues, and each of those issues are topics unto themselves."

One critical question investors should assess in evaluating a company's compensation practices is whether its cash bonus payouts are tied to the firm's financial or stock-market performance, experts say.

Investors should also compare the pay packages and the company's performance to those of its peers or, when studying stock prices, to the broader market averages. Experts also advise against basing conclusions on a single year's statistics.

"There is no [universal] model that can be used as a tool" to easily evaluate whether a chief executive is creating shareholder value in return for the compensation received, said Blair Jones, a consultant who heads the Leadership Performance & Rewards Practice for Sibson & Co., a division of the Segal Co. in New York.

But looking to see if a CEO's compensation is linked to performance is a good place to start, since the best-run companies use "pay for performance" as a means of aligning top executives' interests with those of the firm's stockholders, Jones and other experts said.

Well run or not, public companies in general over the past 20 years have been increasing the variable portion of a CEO's annual pay, swapping guaranteed salary dollars for bonuses, stock option grants and restricted stock.

Surveys conducted by Dorf bear this out. Back in 1985, Dorf surveyed companies and found that CEO compensation was, on average, 50 percent salary, 25 percent bonuses and 25 percent stock, stock options, or some similar long-term investment.

Recent research puts that breakdown now at about 25 percent salary, 30 percent to 35 percent contingent bonuses, and the remaining 40 percent to 45 percent stock or stock options.

A look at the Maryland companies that awarded the 10 largest bonuses shows that most delivered results to their stockholders.

Take Legg Mason Inc. and T. Rowe Price, two companies whose top executive officers last year augmented their relatively modest base salaries with big bonuses while each firm's shares delivered huge gains to stockholders.

During a year in which the broad Standard & Poor's 500 index advanced nearly 9 percent, Legg Mason's stock price soared more than 42 percent and Price's 31 percent.

(Both Mason and Roche cashed in options awarded in previous years, to the tune of $12.2 million and $7.5 million respectively. Neither collected options last year.)

While Roche received an increase, Mason's overall compensation of $7.54 million for 2004 represented a decline of 5.4 percent from his pay package the prior year.

It was the same story at Black & Decker, whose shares soared more than 79 percent. CEO Nolan D. Archibald topped off his higher base salary of nearly $1.46 million with a bonus of $3 million.

He also got stock and option awards valued at $10.7 million, but his total package of $15.6 million for 2004 was more than $1 million less than he got a year earlier.

Big cash bonuses or option grants aren't typically a problem with most shareholders so long as those contingent payouts are backed up by strong stock performance, Dorf said.

"When accompanied by high returns, who cares how much a person is making?" Dorf said. "When that backfires is when shareholders hear of [large bonuses] and the company doesn't have the stock-price increase" to justify the payout.

Big pay packages - salary, cash bonus, stocks and stock options rolled into one - tend to be real eye openers, and if not based upon company performance, the justification can be difficult to decode.

For instance, Guilford Pharmaceuticals Inc., a money-losing Baltimore biotech firm, paid CEO Dean J. Mitchell a total compensation package of $4.8 million in 2004. But the package included $4.4 million in stock options. Guilford shares dropped nearly 27 percent last year.

Guilford had just hired Mitchell, luring him away from pharmaceutical heavyweight Bristol-Myers Squibb. Inside small, or troubled, companies in the cutthroat technology or biotech sector, experts say that compensation committees must often dangle lucrative pay packages to either attract a new CEO, or to keep their existing top executive from jumping to another firm.

In other cases, reasons for big bonuses are not as apparent.

W.R. Grace & Co. CEO Paul J. Norris received a $2.5 million bonus on top of his $1 million salary for 2004. Norris' $5.1 million in total compensation included a retention bonus of $1.24 million and represented an overall increase of more than 52 percent from his pay package in 2003.

The Columbia specialty chemical company did see its shares rocket nearly 430 percent during 2004, albeit from a base of only $2.57 per share.

But the company faces challenges. Norris, who guided the company into Chapter 11 bankruptcy protection in 2001 because of asbestos litigation, won't be there to shepherd it out: he is stepping down as CEO at the end of the month as part of a planned transition. He will remain on the board as non-executive chairman.

Then, early this year, Grace and several current or former executives were indicted on federal charges alleging that the company's vermiculite mine in Libby, Mont. - in use from the 1920s to 1990, before Norris joined the company - harmed workers and the public.

Another top executive, Broadwing Corp. CEO David R. Huber - who founded the company as a maker of high-speed networking equipment, but then shifted it into data-traffic services - received a $2.83 million pay package for 2004, including about $2.4 million in stock options.

His total compensation package was up more than 863 percent from the prior year. Shares of the firm, which has never posted a profit, were down more than 52 percent last year.

But some Maryland CEOs really delivered to shareholders. Take the chief executive at Micros Systems Inc., the Columbia maker of information systems for restaurants, retailers and hotels.

Micros' shares climbed 80 percent last year. The stock-price gains were the result of accelerating sales of hardware and software - products developed during some lean years a decade ago, to which CEO A.L. "Tom" Giannopoulos and other top executives remained committed.

As a result of its success, Giannopoulos' salary, bonus and long-term incentives in 2004 was $3.51 million, up nearly 69 percent from the year before.